The IRS has released new rules that clarify how to determine the dependency exemption between divorced/separated parents for federal income tax purposes. Entitlement to a dependency exemption brings with it many other tax benefits. The parent who may claim a child as a dependent also may claim the child tax credit on behalf of the child, as well as any Hope or Lifetime Learning credits attributable to education expenditures made for the child … provided the other requirements of those provisions are met.

The basics

Usually the custodial parent in a divorce or separation situation is entitled to the tax benefits available for the child. However, a noncustodial parent may deduct an exemption amount for a qualifying child, if the custodial parent releases the claim to exemption. A child is considered a qualifying child of the noncustodial parent if the parents: (1) are divorced or legally separated under a decree of divorce or separate maintenance, (2) are separated under a written separation agreement, or (3) live apart at all times during the last six months of the calendar year regardless of whether or not they were married. Additionally, the child is a qualifying child of the noncustodial parent as long as the parents provide over one-half of the child's support for the calendar year and the child is in the custody of one or both parents for more than one-half of the calendar year.

Release of claim

A custodial parent may release an exemption claim for a child by signing a written declaration that he or she will not claim the child as a dependent. The noncustodial parent must attach the declaration to his or her return to claim the dependency exemption. The declaration may be made on Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents or in a writing that accommodates the substance of Form 8332.

Revocation of release

New rules that are still under consideration would allow a custodial parent who released an exemption claim to revoke the release for future tax years by giving written notice of the revocation to the noncustodial parent. The revocation may be made on an IRS-designated form or by a declaration that accommodates the substance of such form. The revoking parent must maintain a copy of the revocation and confirm delivery to the noncustodial parent. The revoking parent must attach the revocation to his or her return for any tax year the parent claims the exemption.

(NPRM REG-149856-03)